Bailout details ease Greek borrowing costs

European Commissioner for Economic and Monetary Affairs Olli Rehn addresses the media at the European Commission headquarters in Brussels, Sunday April 11, 2010. Finance ministers of the 16 euro nations met in a video conference to discuss the technical details of a financial aid package for Greece

/ AP

European Commissioner for Economic and Monetary Affairs Olli Rehn addresses the media at the European Commission headquarters in Brussels, Sunday April 11, 2010. Finance ministers of the 16 euro nations met in a video conference to discuss the technical details of a financial aid package for Greece. (AP Photo/Yves Logghe)

European Commissioner for Economic and Monetary Affairs Olli Rehn addresses the media at the European Commission headquarters in Brussels, Sunday April 11, 2010. Finance ministers of the 16 euro nations met in a video conference to discuss the technical details of a financial aid package for Greece. (AP Photo/Yves Logghe) (/ AP)

ELENA BECATOROS, Associated Press Writer

A European agreement on the details of a financial lifeline for Greece - should the heavily indebted country need it - won early market support Monday, with Athens' borrowing costs falling as fears of default eased.

Although the package is ready if Greece asks for it, Athens insists it still hopes not to use it and prefers to borrow on the international bond market. Finance Ministry officials say they will wait to gauge market reaction in the coming days and weeks before deciding whether to tap the bailout plan.

"The markets have subjected Greece to psychological terror," he told reporters in an informal briefing in Nicosia. "We need calm and the assurance that the mechanism has given us."

The Greek debt crisis has undermined the euro currency and raised fears of the trouble spreading to other countries with troubled finances such as as Portugal and Spain.

But while the package should provide some breathing space, Greece's problems are far from over. The government still faces a tough fight to restructure its finances, reduce its massive debts and fully restore market confidence damaged by years of overspending and fudging its statistics.

On Sunday, eurozone governments said they would make euro30 billion ($40 billion) in loans available to Greece this year if Athens asks for the money. The International Monetary Fund would also contribute - with about another euro10 billion (US$13.58 billion), officials said.

The amount is more than enough to cover Greece's refinancing needs to the end of the year, officials in Athens say.

The finance ministers of the 16 eurozone nations have now agreed on a three-year financing formula that would mean a fixed interest rate of about 5 percent, while officials said the variable rate would be around 4 percent.

That is still high, but nowhere near the roughly 7 percent that Greece was facing last week on the international market, or the 6.25 percent it borrowed at when it issued a 10-year bond in early March.

"Five percent is certainly high at first reading," said independent economist Vangelis Agapitos. However, he said, while it was still one of the highest eurozone rates, "it's a much more realistic level than the 7 percent we had to face recently."

Sunday's decision filled in details of a March 25 pledge of joint eurozone-IMF help which had failed to convince markets as it had lacked specifics.

"I think it will ease markets' near-term concerns about the Greek government being unable to roll over its debt and therefore defaulting," said Ben May, European economist at Capital Economics Group in London.

However the country, which has pledged a dramatic reduction of its budget deficit from 12.9 percent of gross domestic product in 2009 to 8.7 percent this year, is not out of trouble. While fears of default this year have eased, some analysts think Greece's weak growth prospects and high debt load may eventually lead it to default or restructure its debt payments in coming years.

Neil Mackinnon, global macro strategist at VTB Capital, said that "though the pressure of a near-term default has diminished, it doesn't resolve the solvency issue facing Greece."

Papandreou's Socialist government announced a harsh austerity package last month that cuts civil servants' pay, hikes taxes and freezes pensions. Unions have reacted angrily with a series of strikes - another one is planned for April 22 - while a combination of lower income and higher prices has seen Greeks curtail their spending.

"The fact is, a five percent interest rate is still quite high, especially in the context that Greece is going to go through a pretty severe recession, and we're going to see prices stagnate and possibly even deflation in Greece over the coming years," May said.

"Coupled with relatively high borrowing costs, it still means that the government's debt to GDP ratio is going to continue to rise even if they manage to rein in that deficit quite sharply," he added. "So I think the market is going to remain concerned about the medium term prospects for Greece and that probably suggests that government bond yields aren't going to sink like a stone."

Initial signs were positive. The interest rate gap, or spread, between Greek 10-year government bonds and the German equivalent, considered a benchmark of stability, narrowed by more than 50 basis points to about 340 basis points, or 3.4 percentage points, early Monday before increasing slightly to about 350 basis points in the evening. The narrower the spread, the lower the cost to borrow and the greater the confidence in Greece.

Yet even with that drop, the spread translates into a borrowing cost that is roughly twice that of Germany's. Greece doesn't need to go to the market for large amounts quite yet, and is planning a bond roadshow aimed at winning over investors in the United States at the end of this month. But if the spreads don't narrow further as expected, Athens could well ask for the eurozone-IMF aid package.

"Short-term, Greece needs lower interest rates. If the rates do not go down, I think they will use the mechanism," Agapitos said. "I think it's been a case of a domino. Greece promised, now Europe has promised, now Greece has to take the gun and use it if the spreads do not go down."

Germany, which has vehemently opposed a bailout for Greece, said Monday that the time had not yet come for the aid to be used.

"Just putting up a fire extinguisher on the wall does not say anything about the probability that it will ever be needed," German government spokesman Christoph Steegmans said.

German Finance Ministry spokesman Michael Offer said the decision was aimed at calming the markets, and that Berlin would have to come up with euro8.4 billion for the aid plan if it were activated.

Greece had long argued it was the victim of market speculation that was sending the cost of borrowing spiraling, and that it couldn't afford to keep borrowing at "barbaric" interest rates. Germany had insisted any rescue package should not offer interest rates that are so low they could be seen as a subsidy.

The eventual figure of 5 percent is high enough that even if Athens asks for the help, it will still be under pressure to return to the market quickly.

Greece is auctioning euro1.2 billion ($1.63 billion) worth of treasury bills on Tuesday, which will test the waters regarding interest rates. The country needs to raise about euro11 billion ($14.9 billion) in May.